February's inflation data showed a small pick up to 4.5% but still comfortably within the Reserve Banks target of between 3% and 6%. The income market produced positive returns but was a little subdued relative to property (+7.2%) and equity (+7.1%). Shorter dated bonds (+1.8%) performed better than longer dated bonds (+0.6%) as there was a fair amount of uncertainty regarding the future direction of interest rates. Although the risk to rates is on the upside, STANLIB continues to believe that there will be no change to interest rates in 2006.

The fund performed in line with its benchmark for the quarter however it trailed the benchmark over the past 12 months because the fund is structurally lower duration relative to the benchmark and this hurt as rates declined during the period. The fund produced a 1.6% return for the quarter and an 8.5% return over the past 12 months.

Although STANLIB held a longer duration, the manager's selection of bonds helped it outperform African Harvest during the quarter. STANLIB also held a larger allocation to banks and corporates (OTHI), which fared somewhat worse than government paper (GOVI). Credit quality remains excellent with 80% of the portfolio in AA-grade paper or better.

The Fund declared a 1.61c per unit income distribution for the 1st quarter. The total income distribution over the past 12 months was 7.42c representing an historic income yield of 7.3% (post fees) based on the Fund price of 102.17c on the 1st April 2005 (i.e. 7.42c / 102.17c).

Income assets received a shot in the arm during the quarter following a significant change in language from the Reserve Bank. In the 3rd quarter, the SARB had become more hawkish citing higher global inflation and oil prices as key risks. Interest rates were widely expected to rise at the next Monetary Policy Committee meeting. These fears were however unfounded as inflation came in at 3.7% (y-o-y) for November thanks partly to marginally lower oil prices. The fixed income market rallied accordingly with bonds (+5.0%) and income (+2.7%) producing strong returns for the quarter. Cash was the worst performing asset class for the quarter (+1.6%) and the year (+6.6%). There was no change to official interest rates during the quarter. The Fund produced a 2.0% return for the quarter and an 8.5% return for the year after fees.

Although the fund outperformed its benchmark over the entire year, both managers underperformed the benchmark for the quarter. African Harvest produced returns ahead of STANLIB as a result of their longer overall duration than STANLIB. STANLIB also held a larger allocation to banks and corporates (OTHI), which fared somewhat worse than government paper (GOVI). Credit quality remains excellent with 80% of the portfolio in AA-grade paper or better. Following the better than expected inflation news in November 2005, popular opinion started to shift toward a further rate cut in 2006. This may occur if the Rand finds itself comfortably below R/$6.00 and the oil price drops below $55 per barrel. Whilst this is possible, we see it as unlikely and therefore expect that rates will remain flat in 2006. The Fund declared a 1.81c per unit income distribution for the 4th quarter. The total income distribution for 2005 was 7.89c representing a 10.2% increase on the total income distribution paid in 2004 (7.16c). This was a pleasing result following the move to quarterly income distributions. The historic income yield of the fund was 7.7% (post fees) based on the Fund price of 102.91c on the 1st January 2005 (i.e. 7.89c / 102.91c).